Wade Armstrong

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Chrysler, Ford, GM, and the Dark Side of Sales

Posted Tuesday February 20, 2007 in Entrepreneurship

It’s not a good time to be an American automaker. Ford is undergoing yet another restructuring, only two years after starting their last one. GM is about to become the #2 in the industry — passed, embarrassingly enough, by Toyota. And Chrysler may be sold by Daimler-Benz’s for the fire sale price of $5 billion.¹ It’s like the ’80s again, this time without Lee Iacocca and his K-Car or Michael Keaton running a US auto plant in Gung Ho. How did they blow it so quickly after saving US car companies once? The surprising truth seems to be: sales were too good. And, even more surprisingly, good sales can be trouble for all of us, especially entrepreneurs like me (and maybe you).

Sales hid Detroit’s Weaknesses

Through the ’90s, the Big Three had low productivity, a tough time developing new products, and overcapacity in their factories. But big sales hid all of this:

• Fat margins on the super-popular SUVs meant that inefficiency could be overcome with high pricing.
• Since no foreign automaker had a full line of trucks and SUVs, weakness in new product design was hidden by a lack of competition across the line. For every Toyota light truck or CR-V dominating its market, there was a F-150 or Explorer owning its own niche.
• As trucks became more of the overall market, it didn’t matter that American companies couldn’t design a sedan (quick: name one recent, good American mid-price sedan).

Then truck sales started dropping and Detroit suddenly had to rely on its ability to design actual cars. But Ford didn’t have the ability to design a Five Hundred that was better than the Toyota Camry, and it darned sure didn’t have the ability to make the Five Hundred cheaper. As sales melted away, so did profitability, and now all three American automakers are in trouble.

Sales Can Hide Your Weaknesses Too

Every entrepreneur wants brisk sales for their company. But if Detroit, with thousands of administrative staff and auditors on the Big Three’s payroll, can see big sales hide its costs, imagine how easy it is for a small company. Let’s face it, who has time to track every detail — for most entrepreneurs, face time with clients or quality time doing product development is key to success, not preparing and analyzing financial statements.

That’s where I found myself a month ago. I was speaking with a potential customer about a special version of our product for them, and we were getting close to talking price and volume. Now, I haven’t even gone into production, and already my potential sales were taking my eye off the ball. Positive discussions with potential customers had me plugging big numbers into my sales projections spreadsheet, and every time I did that the bottom line went up. Meanwhile, as the business began to develop from an idea to an actuality, unexpected costs popped up (another phone line; a Dun & Bradstreet DUNS number; city fees; all the million little things that you need to need to think of). As my (projected) sales soared ahead of my (actual) costs, and my bottom line grew, I didn’t notice as my margins shrunk.

The “S” on his Chest is for “Sales Model”

So when I looked at what the potential customer wanted, I realized that we couldn’t do a sale that small. In fact, we couldn’t do a sale the size of most likely sales. I was in trouble. So I went back to the sales model. I found my break-even point and charted out where each dollar was going at that point — rent, salaries, phone, business cards, cost of goods, everything. Of course, some of those numbers were higher than they needed to be. So then I got on the phone and found cheaper vendors, I pushed back hires that I had planned to make in 3-4 months, and I got costs down. Now I can make the batch sizes my customers need, at the prices they want to pay.

The trick there is that I, unlike most entrepreneurs, have a sales model. What can I say, I’m an MBA and I enjoy modeling things out. For most entrepreneurs, getting their feet on the ground and doing something is all-consuming. I love having my feet on the ground, and it feels great that I’m getting traction, but I like having numbers and data behind that too. I have a complete model that takes sales as its input and spits out a complete set of financial statements. Now I plug the latest numbers into this model a couple of times every week and keep track of how my margins are doing.

Great, How Do I Get My Own?

You probably already have one. Maybe it’s in your head — ask yourself why you’re doing the sales activities you’re doing, and what you hope to gain, and you’ll see a model in that. Maybe it’s in your past sales — you can always look back and see what happened in response to what sales activities. Maybe it’s in your loan applications, because those probably required pro forma financials and those were probably based on some sales assumptions. Dig that data out. Try and make it match reality — or, at least, know why and how it doesn’t.

But that’s not the fun or useful part. The fun and useful part is fooling with it. Plug in different numbers, see how you do. You never know what you’ll learn — but whatever it is, you want to learn it when you have plenty of time to make changes, not too late, like Detroit did.

¹ Maybe not as cheap as it seems — some analysts think that Chrysler is dragging Daimler-Benz’s market cap down by €7 billion, meaning that the US concern is actually worth negative dollar